System Development Versus System Tinkering

Using an objective, systematic approach to trading offers several benefits to a trader. He can do his best thinking "up front", build all of his knowledge and experience into a system and then let the system generate the trading signals. This in turn removes the psychological burden of having to make a lot of trading decisions while standing in the line of fire. It also can remove ego from the trading process, thereby eliminating one of the three primary causes of Lack of Discipline. If a particular trade loses money, it can be blamed on the system and the trader does not need to blame himself.

One pitfall that snares a lot of systematic traders is the urge to constantly "tinker" with their trading system. One problem with developing a trading system is that it never quite feels like it's "done." No matter how good a given system performs, the ambitious trader can't help but to think that there must be some way to alter it to improve performance ("...maybe if I lengthened this oscillator or shortened this moving average..."). In the minds of most system traders the best trading system is the one you haven't developed yet. Once a system is "done" it never looks quite as good as it might have. This is what causes traders to tinker.

The danger is that if you are constantly tinkering with your existing system, then you may never truly develop the confidence in it that you need to have in order to stick with it when the going gets tough. If you are tinkering with your system while you are trading, it is likely that you will start changing the rules or adding new rules as you go to match your most recent experience. If you exited the last trade too soon you may find yourself adding another rule to your system to hold trades longer (which may be exactly the wrong thing to do the next time around). If your last four trades were losers in quick succession you may find yourself adding a rule designed to "filter" trades and thereby avoid some whip-saws. While well intentioned and perfectly logical, this may cause you to miss the next big winner altogether. Over time your system starts to look like a house that started out as a two bedroom shanty. Then a garage was added, then a family room, then an upstairs, etc., etc. In other words, it ends up not even resembling its original form. There is nothing wrong with adjusting a trading system. There is, however, a time and a place for everything.

The best advice is to designate a specific time—whether it is once a month, once a quarter, or whatever — at which time you will sit down and analyze all aspects of your system to determine if you have learned anything since the last time that you can use to add value to your current approach. This is when you want to analyze Point A to В and Point С to D for previous trades to determine if you can improve the efficiency of your entries and exits. Doing so in this manner allows you to delve into your system as deeply as you want without the emotional attachment that might otherwise cloud your judgment if you were making a change based solely on your last trade.

The proper approach in order to avoid system tinkering is to:

Develop the best system that you can given your current knowledge base and experience.

Start trading

At scheduled intervals—even while you continue to trade using your original system—open up and analyze each part of your trading system and see if there is anything new that you can add or subtract that might add value. Approach this process with the attitude that "if I improve my system, great, but if not that's OK too."

Following these steps allows you to separate trading from trading system development. Focusing on one task at a time will make you better and more efficient at both.